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Economy

Sovereign Credit Rating for Bangladesh

Tamanna Khan

For Bangladesh, April started with the usual heat, power shortage, water crisis, skyrocketing prices and all the other usual problems. Amidst all the negativity, somewhere some good news was brewing for this small delta. On April 6, 2010 global credit rating agency Standard and Poor's (S&P) published the first-ever Sovereign Credit Rating of Bangladesh, assigning the country a BB- rating on its local and foreign currency bond. A week later, on April 12, US-based credit rating agency Moody's Investor Service gave the country a Ba3. Both these credit ratings implied at Bangladesh's stable economic outlook that became quite evident in the resilience the economy showed during the global financial crisis.

As a developing nation, Bangladesh heavily depends on foreign aid and loans. Each year, a major portion of our revenue is spent behind debt servicing. In spite of its huge debt burden, Bangladesh has never defaulted on foreign loans. Yet it has been difficult for government to obtain loans from the international market, as the country's image in the international arena has been marred by corruption and political instability. Under the circumstances, Bangladesh needed an independent credit rating from an internationally reputed credit agency so that both government and the private sector can easily obtain finance from global market. Last year government signed a deal with world's two topmost credit rating agencies, Standard and Poor's and Moody's Investor Service, to carry out an independent analysis of the financial health of the country. Currently, Moody's Investor Service provides sovereign ratings, an assessment on the likelihood that a particular country will default on its loans, to about 110 countries around the world while Standard and Poor's provide similar ratings to 124 governments.

Sovereign ratings by reputed firms like Moody's and S&P's will modify Bangladesh's image of a poverty stricken, natural disaster prone nation. Now the country's name will also appear in the investment list along with other potential emerging economies of South Asia. S&P's has 17 categories of ratings starting from AAA to CCC+ and Bangladesh with a BB- stands in number 13 category. Compared to other SAARC nations, Bangladesh has scored higher than Pakistan and Sri Lanka but lower than India. Moody's has also rated the country higher than Pakistan, at par with Philippines and Vietnam and slightly lower than India. The agency has also provided separate ratings for the country's foreign currency bond and bank deposit ceiling and long term local currency bond and deposit ceilings.

The ratings indicate that the country's financial strength and balance of payment are reasonably steady. Bangladesh's economy has remained almost unaffected during the recent global financial crisis. Our economy depends heavily on low-cost manufactured goods and foreign remittances of unskilled workers. Generally, at times of recession the demand for low-cost products increases and the export figures of RMG have shown the desired growth. A similar rising trend has been observed in of foreign remittance, which can be explained by the fact that financial slumps usually affect the blue-collar workers. Moreover, the banking sector of Bangladesh with all its regulation and conservatism has easily escaped bankruptcy. The high collateral requirement for obtaining loans and our cultural values of avoiding credit consumption have also played an important role. Even the capital market indices have not dipped severely during that period. In fact, Bangladesh has been able to sustain a GDP growth rate of above 6 percent since the year 2002.

The ratings will definitely bring Bangladesh to the attention of investors worldwide. It will help the government to assess the country's economic risk, float foreign currency bonds in the international market and also obtain foreign loans at a lower interest rate. The cost of international trading will go down for the private sector. The ratings are expected to have a positive impact on FDI and portfolio flows. However to sustain such position Bangladesh needs to overcome its supply side bottlenecks, diversify and broaden its export and industrial base and implement policy level decision on regional integration and financial sector reforms.